Economists to focus on April inflation report as Bank of Canada rate decision draw closer

Forecasters expect this week’s inflation report to show Canada’s inflation rate fell last month, but financial markets are still unsure whether a June interest rate cut is in the cards for the Bank of Canada.

 

Statistics Canada is set to release its April consumer price index report Tuesday. The new inflation data will be consequential for the Bank of Canada as it gears up for its June 5 interest rate decision.

 

BMO chief economist Douglas Porter says he expects the annual inflation rate slowed to 2.8 per cent in April, down a tick from 2.9 per cent in March. He also anticipates core measures of inflation, which strip out volatile prices, inched lower as well.

 

But Mr. Porter said the central bank may need to see an even lower inflation print to be convinced to cut interest rates next month.

 

“I think it will probably take something even a little bit milder than what we’re calling for to convince [the BoC] to cut in June,” Mr. Porter said in an interview.

 

Economists have been widely expecting the central bank to begin lowering its policy rate in June or July, given the economy has clearly slowed in response to higher interest rates.

But recent strong employment figures have shifted expectations away from an interest rate cut next month. That’s made the upcoming inflation report particularly important for forecasters who are trying to solidify their rate calls.

 

The fact that the U.S. Federal Reserve may take longer to begin lowering its policy rate is also tempering rate cut expectations in Canada.

 

Financial markets are currently placing the odds of a Bank of Canada rate cut in June at about 40 per cent, Mr. Porter said.

 

Over the last few months, the Bank of Canada has been encouraged by the slowdown in price growth. Core measures of inflation have trended downward and high inflation has become less broad-based in the economy.

 

Governor Tiff Macklem has acknowledged the central bank is inching closer to an interest rate cut. But he said the central bank needs to see the downward momentum sustained for longer.

 

“I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut?” Mr. Macklem said at the April rate decision.

 

“The short answer is, we are seeing what we need to see but we need to see it for longer to be confident that progress toward price stability will be sustained.”

 

The summary of deliberations released two weeks after the April interest rate decision suggested the members of the governing council were split on how long the Bank of Canada should wait before cutting interest rates.

 

“Some members emphasized that, with the economy performing well, the risk had diminished that restrictive monetary policy would slow the economy more than necessary to return inflation to target,” the summary said. “Others placed more emphasis on the progress made in bringing inflation down.”

The Bank of Canada’s key interest rate currently sits at five per cent, the highest it’s been since 2001.

 

Meanwhile, some economists are holding on to their bet of a rate cut in June.

 

“Absent an upside surprise, we think the soft conditions in the economy and labour markets should warrant a 25 basis points interest rate cut from the BoC in June,” wrote RBC economists in a client note on Friday.

 

RBC is forecasting the annual inflation rate fell to 2.7 per cent in April.

 

Royce Mendes, managing director and head of macro strategy at Desjardins, also expects Tuesday’s inflation report to set the stage for an interest rate cut in a few weeks.

 

“From the metrics that we watch most closely, underlying inflation is normalizing. And we should see more evidence of that in the upcoming report,” Mr. Mendes said.

 

“I think that will tip the scales in favour of a June Bank of Canada rate cut to begin the cutting cycle.”

 

 

 

 

This article was first reported by The Globe and Mail